Air Canada reaches deal for Transat, but shareholder approval up in the air

Air Canada reaches deal for Transat, but shareholder approval up in the air

MONTREAL — The board of directors of Transat AT Inc. has approved a $520-million takeover offer by Air Canada, but the deal might have trouble taking off if major shareholders who have expressed disapproval do not get on board.

The companies announced Thursday that Air Canada will pay $13 per share for the travel company.

Under the agreement, Air Canada said it plans to preserve the Transat and Air Transat brands and keep the Transat head office and its key functions in Montreal.

In approving the Air Canada offer, the Transat board turned down a rival bid by Group Mach Inc., a Quebec real estate developer that offered $14 per share for Transat.

The deal may face an obstacle in Transat’s biggest investors.

Letko, Brosseau and Associates and PenderFund Capital Management, which jointly own a 21.1 per cent stake, have said they would vote against the agreement if the purchase price remained at $13 per share.

The agreement requires approval from two-thirds of Transat shareholders to go through. Quebec’s Fonds de solidarite FTQ, Franklin Templeton Investments, and the Caisse — Quebec’s pension fund manager — are also among the top five investors, collectively holding a 26.18 per cent stake.

Air Canada and Transat have a combined 60 per cent slice of the transatlantic market from Canada and a firm hold on Montreal air travel, likely triggering an assessment from Canada’s Competition Bureau.

Both Air Canada and Transat sought to play down the threat of market dominance.

“Travellers will benefit from the merged companies’ enhanced capabilities in the highly competitive, global leisure travel market and from access to new destinations, more connecting traffic and increased frequencies,” Air Canada chief executive Calin Rovinescu said in a release.

“For our clients, it will offer even more choices and possibilities,” said Transat chief executive Jean-Marc Eustache, who co-founded the company’s predecessor in the early 1980s.

He said customers can continue to book flights and packages “with complete confidence,” as bookings will be honoured before and after deal closes.

Transat’s move toward a newer, all-Airbus fleet will come as a relief to the country’s biggest airline. Air Canada’s two-dozen 737 Max 8 jets — grounded along with virtually all 737 Maxes across the globe after two recent crashes killed 346 people — comprise about 20 per cent of its narrow-body fleet, costing the company cash as it leases less efficient Airbus A320s and three Embraer E190s.

Analysts have also pointed to the uphill battle Transat fought against large airlines that are plugged in to carrier alliances and sprawling hub-and-spoke systems, which enable more flights, higher passenger volumes and more efficient use of aircraft.

“Becoming a part of Air Canada would seemingly solve these issues so we therefore see an Air Canada offer as the best option for Transat’s long-term viability,” said analyst Cameron Doerksen of National Bank of Canada in a note to investors this month.

Transat is also attempting to roll out a $750-million plan to develop a hotel chain in the Riviera Maya and the Caribbean.

Transat’s share price dropped by 94 cents or nearly seven per cent to $13.25 in mid-morning trading on the Toronto Stock Exchange. Air Canada shares went up by $1.15 or nearly three per cent to $40.51.

The Air Canada deal includes a break fee of $15 million payable by Transat if it accepts a superior proposal.

Air Canada must pay a reverse break fee of up to $40 million if the transaction is cancelled because regulatory or governmental approvals are not obtained, subject to certain conditions.